Who Shot Argentina?

When Cristina Kirchner first ran for president of Argentina in 2007, she had a campaign commercial with adorable young children answering the question, “What is the IMF (International Monetary Fund)?” They offered cute little ridiculous answers like “The IMF is a place where there are many animals,” and the punch line from the narrator was: “We have succeeded in making it so that your children and grandchildren won’t know what the IMF is.”

To this day, there is no love lost between the IMF and Argentina, since the fund presided over Argentina’s terrible economic collapse of 1998-2002, as well as numerous failed policies in the years prior. But when the U.S. Court of Appeals for the Second Circuit ruled in favor of vulture funds trying to collect the full value of Argentine debt that they had bought for 20 cents on the dollar, even the IMF was against the decision.

So it surprised many observers last Monday when the U.S. Supreme Court refused to even review the appellate court’s ruling. The court only needs four justices to grant a petition for “certiorari,” or review, and this was an extremely important case. Most experts agree that it has serious implications for the international financial system. Perhaps most importantly, the appellate court ruled that Argentina must pay the vulture funds if it is going to pay the more than 90 percent of bondholders who accepted a restructuring agreement in 2005 and 2010.

What does this mean? In the midst of a deep recession and unable to finance huge debt payments, Argentina defaulted on its debt at the end of 2001. The default was the right move; the Argentine economy began a robust recovery just three months later. But it was not until 2005 that 76 percent of the bondholders agreed to accept a restructuring that included a “haircut” of about two-thirds of the value of their bonds. By 2010, more than 90 percent of the bondholders had joined, accepting new bonds in place of the defaulted ones.

The court’s decision means that a vulture fund, or any “holdout” creditor, can prevent or destroy an existing agreement negotiated with the rest of the bondholders. Since there is no such thing as bankruptcy law for government borrowers, this would severely limit the ability of creditors and debtors to work out an orderly agreement in the event of sovereign debt crises. This is a very big deal for the functioning of international financial markets.

So why didn’t the Supreme Court hear the case? It could be that the court was influenced by a change of position on the part of the U.S. government, which may have convinced it that the case was not that important. Unlike France, Brazil, Mexico and Nobel Prize winning-economist Joseph Stiglitz, the U.S. government did not file an amicus brief with the Supreme Court, despite its filing in the appellate case. And – here is the big mystery – neither did the IMF, even though it has publically expressed concerns about the impact of that ruling.

On July 17, 2013, IMF Managing Director Christine Lagarde submitted notice that the fund would file an amicus brief with the Supreme Court. But then the IMF board met and, somewhat embarrassingly, because of objections from the U.S., decided against it. This could be why the Supreme Court did not invite a brief from the U.S. solicitor general, and ultimately did not hear the case. But who is responsible for Washington’s reversal?